POINT OF VIEW: CO2 geological sequestration opens opportunities for Permian basin

Guntis Moritis
Production Editor

Houston, Dec. 1 -- Geological sequestration of carbon dioxide may invigorate petroleum activity in the Permian basin of West Texas and New Mexico, envisions L. Stephen Melzer, a long-time consultant and oil and natural gas investor in Midland, Tex.

The basin encompasses the Texas Railroad Commission's Districts 7C, 8, and 8A and New Mexico counties of Lea, Roosevelt, Eddy, and Chaves.

It remains one of most important US oil and gas regions, producing about 900,000 b/d of oil and 4 bcfd of gas. Output from the basin, however, has decreased from the highs of 2 million b/d of oil in 1973 and 9.8 bcfd of gas in 1974.

The basin also is the world capital for CO2 injection for enhancing oil recovery. Its extensive pipeline and facility infrastructure moves and injects more than 1.1 bcf (63,000 tons) of new CO2 each day into oil reservoirs to produce about 160,000 b/d of oil that would have remained unexploited. Production from CO2 flooding has seen a steady growth to where it now represents 18% of the oil production from the Permian basin.

As overall production declines, Melzer relates a concern that, as the major oil companies continue their exodus from the region, the smaller operators may not continue investing for the long term.

He gives three main reasons for why most of these smaller companies lack interest in investing in such activities as enhanced oil recovery. One is that many of these companies are not comfortable with the required technology. Another is that the return on capital for such projects is lengthy. A third, which effects Texas but not New Mexico, is that Texas does not have rules conducive for unitizing (pooling) of leases. This has resulted in companies conducting CO2 flooding mainly on fields that were unitized in the 1950s and 1960s.

Melzer adds that the negative cash flow during the initial years of EOR projects "is a steep hill climb" for the smaller operators. But he says that, "incentives for sequestering anthropogenic (manmade) CO2 could create the necessary elements for a dramatic increase in CO2 flooding in Permian basin reservoirs."

Also, Melzer says that even with many major companies leaving, "the basin still has a widespread spirit of optimism." A number of companies are willing to expand CO2 flooding in the basin and are adding employees to the local communities.

One such company is Occidental Petroleum Corp. unit Oxy Permian, which remains the basin's main CO2 flood operator. Its latest project was the CO2 flood in the North Hobbs field in Lea County, NM, and the company plans to expand CO2 injection at the Dollarhide, Cogdell, and Levelland fields in Texas. It also has many other flood candidates.

Another CO2 flood expansion is ongoing in the Kinder Morgan CO2 Co. LP-operated Scurry Area Canyon Reef Operators Committee (Sacroc) Unit, in Scurry County, Tex. Oil production has increased from 8,000 b/d at the time of their acquisition to over 20,000 b/d of oil today. With its recent purchase of Marathon Oil Co.'s interest in the giant Yates field, Kinder Morgan also plans to reinstate CO2 flooding there.

Kinder Morgan is the main vendor of nonanthropogenic CO2 in the basin, and operates an extensive distribution network to move the CO2 to the basin from source fields in Colorado and New Mexico.

These planned expansion, according to Melzer, will be absorbing most of the available CO2 in the basin, which means that the smaller operators may "get shut out of the CO2 market."

Promoting investments
The University of Texas of the Permian Basin (UTPB) at its Center for Energy and Economic Development (CEED) facility has actively promoted increased investment in oil and gas activities in the basin. UTPB's Petroleum Industrial Alliance (PIA), located at CEED, is the entity through which UTPB works with the oil and gas community with the stated mission to:

-- Provide technology transfer activities and events for the Permian basin petroleum community.
-- Conceive and conduct research projects related to Permian basin oil and gas development.
-- Act as an effective catalyst for bringing new oil and gas projects to the Permian basin.

The CEED facility opened in 1992 and is half way between Midland and Odessa, which lie in the heart of the Permian basin. The facility is about 3 miles north of the airport that serves both cities.

Melzer has worked with CEED as an advisor and technical transfer facilitator, especially on the annual CO2 conference that covers enhanced oil recovery through CO2 injection.

UTPB/PIA and the Society of Petroleum Engineers (SPE) will hold the ninth such conference on Dec. 10-12. Melzer describes the conference as focused on technology transfer of the previously tightly held technology of CO2 flooding and encourages a cross-discipline approach among geology, business, and engineering. This year the conference moves back to the Midland Center, in downtown Midland. For the last few years, the CEED facility hosted the conference.

As the worldwide concerns have grown related to the role that certain gases including CO2 can play in global warming, CO2 flooding has emerged as the leading process for sequestering CO2 that would otherwise be vented to the atmosphere. This year PIA will hold a complementary workshop on Dec. 9 that deals with CO2 geologic sequestration for carbon management. The workshop will focus on the incentives under consideration for CO2 sequestration and on ways companies may earn tax credits and minimize emission control costs, thereby changing CO2 from a waste product to an asset.

CO2 activity
The CO2 for injection in the Permian basin currently comes from three natural CO2 source fields in Colorado and New Mexico, although Val Verde basin natural gas plants, in southwest Texas, also supply some CO2 for injection. The Val Verde plants and PetroSource Energy Co., catch the CO2 prior to venting, compress, and deliver to a PetroSource pipeline serving several oil fields in the southern portion of the Permian basin.

With incentives, Melzer expects that the Val Verde area could provide much greater amounts of CO2.
For instance he mentions that CO2 emission reduction trading credits (ERCs) could be used to provide incentives for capturing and sequestering anthropogenic CO2. The value of these credits could accrue in part to the EOR companies providing an additional revenue stream to provide the needed incentives to grow CO2 flooding and sequestering activity. Recapture and reinjection of CO2 produced with the oil would be necessary of course but CO2 EOR practices already provide for that.

EOR projects outside of the Permian basin mostly rely on CO2 captured anthropogenic emissions from various industrial plants.

The Weyburn field in Saskatchewan, operated by Encana Corp., and the Salt Creek field in Wyoming, undergoing development by Anadarko Petroleum Corp., are two very large EOR projects that rely on an anthropogenic CO2 sources. Two smaller projects operated by Core Energy LLC in Michigan and a new pilot project in Kansas are also examples.

Weyburn receives its CO2 from the coal gas synfuels plant operated by Dakota Gasification Co., in Buelah, ND. Salt Creek will obtain CO2 from the LaBarge natural gas processing plant operated by ExxonMobil Corp. in western Wyoming. LaBarge also supplies CO2 to several CO2 floods, including the Rangley field in Rio Blanco County, Colo., operated by ChevronTexaco Corp.

Melzer says that although in the US there is no direct effect from the Kyoto protocol, which aims eventually to limit worldwide CO2 emission because of a threat that excessive anthropogenic CO2 in the atmosphere causes global warming, he does detect a serious and growing public pressure on companies to address the "green issue."

Ontario Power Generation along with two or three other Canadian companies have bought ERCs, according to Melzer. He says that these transactions were for only a nominal sum of about $1/ton ($0.05/Mscf), but he understands that in Europe some ERCs have sold for upwards of $5-10/ton ($0.25-0.50/Mscf). Trading of ERCs is also under way in Australia.

Purchasers of ERCs have been limited to foreign companies; however, Entergy Corp. is the first US utility to announce purchase of ERCs for voluntary CO2 emission offsets.

Another project that could benefit from ERCs or other incentives is Ridgeway Petroleum Corp.'s huge helium and CO2 discovery near St. Johns, Ariz. Melzer has worked as an advisor for Ridgeway. Ridgeway plans including building a helium extraction plant and taking the by-product CO2 via pipeline to supply CO2 to EOR projects.

Contact Guntis Moritis at Guntism@ogjonline.com.

Career highlights

L. Stephen Melzer grew up in Midland, Tex. and moved back to Midland in 1978 after working in research for the US Air Force. In 1978, he formed Melzer Exploration Co., and opened an office of Science Applications International Corp. In 1994 he formed Melzer Consulting to advise companies of the multi-faceted business issues of CO2 flooding. His office is a 2 1/2-person business engaged in consulting and investing in exploration and development projects.

Melzer has a BS in geological engineering from Texas A&M University and a MS in engineering from Purdue University.

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